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Betterment

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In today’s low-interest rate environment, most investors know that parking their money in a bank CD is a nearly surefire way to lose against inflation. But at the same time, to the average individual, investing in the stock market can seem overly complicated. So what’s the smart money to do?Traditionally, investing and asset allocation has required basic finance skills — which many individuals lack. Likewise, the steep fees of professional advisors have put off everyday investors. As a result, advisors are usually available only to high-net-worth individuals.

Enter the Robo AdvisorsThese services use computer algorithms to generate personalized advice and manage your investment portfolio. So they offer a solution that takes some of the stress, frustration and high fees out of investing.

Betterment has risen to the forefront as one of the biggest robo investing platforms in the industry. But it’s far from being just a cold algorithm. Betterment prides itself on its ability to give retirement advice as a fiduciary, as well as its sterling customer service record. For an extra fee, you can even have unlimited phone access to a human advisor or purchase a personalized financial advice package.

  • Custom Asset Allocation — Based upon your risk profile and account type (taxable vs. tax-deferred), the asset allocation is customized.
  • SmartDeposit — You can automatically make deposits if your bank balance goes over a specified amount.
  • Tax-Coordinated Portfolio — Asset-allocate your investments to maximize the tax efficiency between your tax-deferred and taxable accounts held at Betterment.
  • Two-Factor Authentication — Secure your account via SMS text or an authenticator app on your smartphone.
  • App Passwords — This allows personal financial services such as Mint, Personal Capital or TurboTax to a read-only view of your financial information without giving away your master password.
  • Socially Responsible Investing Portfolio — Investing not only can help you make money but can also make a difference. Betterment offers Social Responsible Investing (SRI) ETFs to achieve your goals and make the world a better place.
  • BlackRock Target Income Portfolio (New) — This portfolio is designed for those in retirement or investors wanting a low-risk portfolio. The portfolio is 100% composed of bonds to give investors income with low risk.
  • Goldman Sachs Smart Beta Portfolio (New) — Competing with Schwab, Betterment now also implements Smart Beta with this portfolio in the hopes of improving returns over using traditional indexing.
  • Talk to Financial Expert via Betterment’s App (New) — Got a financial question? Just like texting a friend, you can send a message to a financial expert within the Betterment app. This unlimited feature is available to all Betterment customers.
  • Charitable Giving (New) — Betterment allows customers to donate shares directly from their accounts to charities. This can save investors at tax time because they will avoid capital gains taxes on donated shares.
  • Flexible Portfolios (New) — Available for investors with $100,000 or more in investible assets at Betterment, these portfolios allow you to customize your portfolio by adjusting your individual asset class weights. You’ll receive feedback from the Portfolio Analysis tool on your selections.
  • Financial Advice Packages (New) — Betterment now offers individual advice packages that answer its customers’ most pressing financial questions. Packages are tailored to specific life events and include personalized action plans, educational content and one-on-one help from a certified financial planner or licensed financial expert.
  • Betterment Everyday Cash Reserve (New) — Betterment’s new Everyday checking and savings platform replaces Smart Saver. The savings account offers an APY of up to 2.04%, which is among the highest in the industry. Checking accounts will come with a bright blue Betterment Visa Debit Card and provide worldwide ATM fee reimbursement, no minimum required balance, FDIC insurance and no account fees. While the Savings accounts are available right now, checking accounts will become available later in 2019.

Betterment is designed so that you have access to a lot of automated options. And because the process is streamlined, it requires little day-to-day involvement. Compared to traditional investing options, it’s “set it and forget it.”

How Does Betterment Work?

When saving, we don’t care about investment theory; we care about the result. We are investing for a purpose, whether it’s retirement, college, a home down payment or a vacation to Hawaii.

This robo advisor is all about the endgame, walking you back through the steps required to meet your end goal. From your initial deposit, monthly savings and time horizon, Betterment will tell you the chances of achieving your objective.

Recently, Betterment strengthened its holistic approach to helping you reach your goals by allowing you to link up external investing and retirement savings accounts. This way, you can get a better, more complete picture of where you are on reaching retirement (or a new house, college education for your kids, etc.). Betterment will analyze these external accounts to advise you on their asset allocation, as well as projecting what your money would look like if you rolled those accounts over to Betterment.

There’s no researching which investments you need to purchase for your portfolio or what percentage for each. The service does this for you automatically. So Betterment makes investing easy for beginners. But more advanced investors may want to take advantage of Betterment’s tax-conscious advice and features, as well.

The company’s goal is to maximize your return while at the same time minimizing your risk. Although this sounds like an impossible task, in reality, it’s not. So how the heck does Betterment do this? The service uses Modern Portfolio Theory or MPT for short. By investing in a diverse pool of assets, it should collectively lower your risk yet stabilize your returns over the long term.

How’s Betterment Different?




Betterment was created to make investing as easy as opening a bank account. But let me be clear: Although the service is an SEC-registered broker-dealer and a member of FINRA/SIPC, it is not FDIC insured. Therefore, your returns are not guaranteed and are subject to market risk. It’s possible your investment could lose principal. But if you take a look at other investment options that don’t have the principal risk, you’ll see that they still do have other types of risk.

With the service, you don’t own individual stocks or bonds; instead, investments are held in the form of exchange-traded funds (ETFs). The ETFs own a portion of the equities market via indexing. As a plus, the asset allocation among these various ETFs then ensures your account is not weighted too heavily in one particular area, company, country or sector. While this doesn’t lead to outrageous returns, it prevents you from putting all of your eggs in one basket.

Betterment is the largest independent robo advisor (we think it’s one of the best). Unlike the robo investing products offered by big names such as Schwab Intelligent Portfolios or Fidelity Go, Betterment doesn’t own any of the funds it recommends. It’s also a fiduciary, meaning it’s legally bound to act in your best interest. So you can have the peace of mind that the platform is working for you.

Easy Signup Process

The signup process is easy and takes approximately five minutes. First of all, you respond to a series of short questions about your investment needs. There is also a slide bar that allows users to set the allocation of their assets — e.g., 60% stocks with 40% bonds. It will also suggest an asset allocation to keep you on track for your goals. Once you’ve made your choices, you must then link your personal checking account. You can either transfer money into your Betterment account whenever you desire or set up an automated deposit.

When money is moved into the account, Betterment will then automatically purchase exchange-traded funds (ETFs). The purchases will be made based on the way you’ve defined your asset allocations. Your investments are very liquid, and selling your investments is also made simple. Betterment will perform the “sell” trades for you. Any dividends earned will be automatically reinvested. Portfolios are rebalanced and tax-loss harvesting is applied (if required) on a daily basis.

Portfolios

Betterment has grown beyond offering just one portfolio, and there are now options for customization (see “Flexible Portfolio” below). Here are the different portfolio products that the platform currently offers (as of July 2018).

Betterment’s Core Portfolio

This is the basic portfolio that most Betterment users will own. This core portfolio is composed of both stock- and bond-based exchange-traded funds (ETFs).

Stocks

Sector ETF Ticker
U.S. Vanguard U.S. Total Stock Market VTI
Large Cap Vanguard U.S. Large-Cap Value VTV
Mid Cap Vanguard U.S. Mid-Cap Value VOE
Small Cap Vanguard U.S. Small-Cap Value VBR
Foreign Vanguard FTSE Developed Markets VEA
Emerging Market Vanguard FTSE Emerging Markets VWO

Bonds

Sector ETF Ticker
U.S. High-Quality Bonds iShares Barclays Aggregate Bond Fund AGG
Muni iShares National AMT-Free Muni Bond MUB
U.S. Inflation-Protected Vanguard Short-Term Inflation-Protected Securities VTIP
International Developed Market Vanguard Total International Bond BNDX
Emerging Market iShares Emerging Markets Bond EMB
Corporate iShares iBoxx $ Investment Grade LQD
U.S. Short-Term Treasury iShares Barclays Short Treasury Bond SHV

The percentages of the ETF allocation are no longer fixed, either. Depending upon your allocation of stocks to bonds, Betterment adjusts the allocation of each individual ETF to meet the efficient frontier. In plain English: Betterment has optimized the portfolio to give you the best performance possible.

All of the ETFs the service has selected are great picks. They all follow their respective indexes very closely and are very liquid (which lowers the bid/ask spread), tax efficient and low in annual fees.

However, even with these recent changes in allocation, I would still like to see some additional asset classes beyond ETFs, such as commodities and REITs. Still, Betterment’s philosophy is that REITs and commodities held on their own — rather than within an ETF — could overexpose your portfolio.

Socially Responsible Investing Portfolio




In recent years, many investors have become keenly aware of the impact their dollars can have on the world. Whether for humanitarian or environmental reasons, socially responsible investing (SRI) has become a hot topic.

Betterment is one of the robo advisors at the forefront of this trend, with its charitable giving options and now with a portfolio designed with a slant toward SRI. In designing its SRI portfolio, Betterment took two goals into account:

  1. Reducing exposure to companies involved in activities deemed irresponsible on either an environmental, social or governmental level; and
  2. Increasing exposure to companies that are striving to solve environmental and social challenges.

Here’s how Betterment’s SRI portfolio works: It invests your money in Betterment’s core portfolio (minus VTI and VTV, plus these conscious additions:

  • iShares MSCI 400 Social Index Fund (DSI)
  • Vanguard Mid-Cap Growth (VOT)
  • Vanguard Small Cap Growth (VBK)

With this in mind, here’s the current makeup (July 2018) of Betterment’s SRI portfolio:

Stocks

Sector ETF Ticker
U.S. iShares MSCI 400 Social Index Fund DSI
Small Cap Vanguard Small Cap Growth VBK
Mid Cap Vanguard U.S. Mid-Cap Value VOE
Mid Cap Vanguard Mid-Cap Growth VOT
Small Cap Vanguard U.S. Small-Cap Value VBR
Foreign Vanguard FTSE Developed Markets VEA
Emerging Market Vanguard FTSE Emerging Markets VWO

Bonds

Sector ETF Ticker
U.S. High-Quality Bonds iShares Barclays Aggregate Bond Fund AGG
Muni iShares National AMT-Free Muni Bond MUB
U.S. Inflation-Protected Vanguard Short-Term Inflation-Protected Securities VTIP
International Developed Market Vanguard Total International Bond BNDX
Emerging Market iShares Emerging Markets Bond EMB
Corporate iShares iBoxx $ Investment Grade LQD
U.S. Short-Term Treasury iShares Barclays Short Treasury Bond SHV

In addition, IRA portfolios will contain the Vanguard Total Bond Market Index Fund (BND), and taxable accounts will contain the iShares National Muni Bond ETF (MUB).

BlackRock Target Income Portfolio

Betterment has joined forces with asset management corporation BlackRock to create a special portfolio designed to produce income with low risk.

The portfolio strategy is a diversified 100% bond basket. Investors can choose from four risk levels, each with its own targeted level of income yield. The higher the potential income, the greater the risk.

This portfolio could be a solid choice for retirees looking for stable, dependable income as well as a way to preserve their nest eggs. It’s also a solution for investors who would like a lower-risk investment than stocks.

Here’s the breakdown:

Percentage ETF Ticker
80% U.S. Short-Term Treasury Bonds SHV
20% U.S. Short-Term Investment Grade Bonds NEAR

Everyday Cash Reserve Accounts (New)

If you’re bored by the ho-hum interest rates offered by savings accounts at your local bank, Betterment now offers an investing account using low-risk bonds for high returns — an expected 2.04% .

If you’re a Betterment customer, you can get an Everyday Cash Reserve account without paying a single penny in fees.

Betterment can make funding your savings account a no-brainer, too. The service’s Cash Analysis tool examines your checking account to look for excess cash. Then Betterment will use its Two-Way Sweep function to push this extra cash into your savings account.

Of course, you can turn these functionalities on and off.

Goldman Sachs Smart Beta Portfolio

For those investors who are not allergic to risk, there’s also the new Goldman Sachs Smart Beta Portfolio. This portfolio seeks to outperform a conventional investing strategy using smart beta. It intends to give investors higher returns by eschewing market capitalization weightings in and across equity asset classes.

With a smart beta approach, overall market performance is considered only one of many factors that can affect investment returns. By addressing other factors, this strategy means more risk but also the potential for greater returns.

Betterment’s new portfolio strategy was developed by the smart beta experts at Goldman Sachs Asset Management.

Flexible Portfolios

For experienced investors who want more control over their portfolios, Betterment now offers Flexible Portfolios. These portfolios allow users to adjust the individual asset class weights. You’ll still receive feedback from the Portfolio Analysis tool as to the risks of your selections, but the choice will ultimately be up to you.

With Flexible Portfolios, you’ll have access to features that can save you at tax time, such as tax-loss harvesting and tax coordination. And these portfolios work with all account types — including Roth and Traditional IRAs.

This feature is available for accounts with $100,000 or more and is not valid for Betterment’s Socially Responsible Investing, BlackRock or Goldman Sachs portfolios.

Tax Loss Harvesting+ (Updated)

The service offers tax loss harvesting (TLH), which helps boost your after-tax returns and is twice as effective as other TLH strategies. Basically, an investor with Betterment can improve their after-tax returns by capitalizing on investment losses.

Betterment uses these secondary ETFs to help protect your assets in a TLH+ portfolio:

Sector ETF Ticker
US Schwab US Broad Market ETF SCHB
US iShares S&P 1500 Index Fund ITOT
Large Cap Schwab US Large Cap Value ETF SCHV
Large Cap iShares S&P 500 Value ETF IVE
Mid Cap iShares Russell Midcap Value Index IWS
Mid Cap iShares S7P MidCap 400 Value Index IJJ
Small Cap iShares Russell 2000 Value Index IWN
Small Cap iShares S&P SmallCap 700 Value Index IJS
Foreign Schwab International Equity ETF SCHF
Foreign iShares Tr/Core MSCI EAFE ETF IEFA
Emerging Market iShares Inc/Core MSCI Emerging IEMG
Emerging Market Schwab Emerging Markets Equity ETF SCHE

Bonds

Sector ETF Ticker
U.S. High-Quality Bonds Vanguard Total Bond Market ETF BND
Muni SPDR Nuveen Barclays Capital Muni Bond TFI
Emerging Market Vanguard Emerging Markets Government Bond VWOB
Emerging Market PowerShares Emerging Markets PCY Debt PCY
Corporate Vanguard Intermediate-Term Corporate Bond VCIT
Corporate SPDR Portfolio Intermediate-Term Corporate Bond ITR

This service doesn’t require any action on your part and is fully automated for Betterment customers. The extra growth within the investment portfolio has been studied and found to offer no additional risk or cost. See the graph below:

Is tax-loss harvesting right for you?

According to Betterment, tax loss harvesting is best for the majority of investors who can write off losses against capital gains. If your capital losses exceed your capital gains, you can still claim the excess loss up to $3,000, or up to $1,500 if you are married filing separately, provided you have other income of at least the amount you’re claiming as a loss. If you’re in a high tax bracket and start using tax loss harvesting now, this service will become more beneficial over time.

Previously you needed more than $50,000 to gain access to tax loss harvesting. However, all taxable accounts now have access to this feature. No minimum deposit is required. But in reality, only larger accounts really see the benefits of TLH.

The company also just announced Tax Loss Harvesting+ across multiple accounts for spouses. If used effectively, it can double the size of your tax-efficient space. Plus, it sets Betterment up to incentivize you to have all your accounts with the service.

Retirement Goals

Until recently, Betterment offered a feature called RetireGuide. RetireGuide aimed to give users personalized advice about planning for retirement. But according to Betterment, it wasn’t perfect.

Betterment has now retired RetireGuide and has redesigned its systems to better help you set and meet your retirement savings goals. Now Betterment has a wider scope — it lets you analyze the diversification of your portfolios held not only within Betterment, but externally as well.

Rather than offering RetireGuide as a separate tool in a separate place on the website, Betterment’s retirement advice is now integrated into your Retirement Goals section. You can now link up your external accounts to the goals you’ve set within Betterment, and your entire retirement balance will show up in the Summary tab.

Betterment will alert you to any allocations found in your external account that doesn’t fit with the platform’s advice. It will also show you a preview of what your money would look like if you chose to roll over your external accounts into Betterment.

Financial Advice Packages

Betterment has rolled out a collection of personalized advice packages to answer its customers’ most pressing financial questions. The company reports that questions about financial planning often arise around major life events. Betterment wanted to create a way to provide advice that addresses these challenges in a sensitive and sensible manner and for a low, fixed cost.

The package themes are:

  • Getting Started Cost: $149
  • Financial Checkup Cost: $199
  • College Planning Cost: $199
  • Marriage Planning Cost: $299
  • Retirement Planning Cost: $399

Each package includes a one-on-one call with a licensed financial expert, an action plan specifically tailored for your needs and situation, and exclusive educational content to help keep you informed.

How Much Does It Cost to Use Betterment?

Plan Minimum Annual Fee Features
Digital $0 0.25% Messaging via App with financial experts, Rebalancing, TLH+ and RetireGuide
Premium $100,000 0.40% Messaging via App + Unlimited calls with CFPs; Assistance with external investments

Until recently, Betterment users who kept a balance of $2 million or more received a discount. However, this is no longer the case.

Included in both plans is the ability to message a financial question to Betterment’s financial experts. No different than sending a text message to your friend, you can ask a financial question within Betterment’s app. Betterment will respond back within its business hours. For individuals who want more hand-holding from a human life form than just digital zeros and ones, Betterment now offers the Premium tier. This service is optional once you reach the $100,000 investment threshold. The primary advantage of the Premium plan is assistance with investments outside Betterment — retirement accounts, stocks, or other life events. The other benefit is unlimited access to Betterment’s CFP professionals. With the Premium plan, you’ll be happy to know Betterment can assist with your 401(k) plan and give advice on asset allocation.

Pros and Cons

Pros

  • Simple Asset Allocation — Betterment teaches the ropes to invest and, more importantly, proper asset allocation.
  • Low Management Fees — A flat-rate 0.25% annual fee for Betterment’s automated service. 0.40%/year for its advisor service.
  • Perfect for Young Investors — Betterment makes investing accessible to young investors by automating the investing process.
  • Tax-Coordinated Portfolio — With tax and tax-deferred accounts at Betterment, it’s possible to minimize the taxes you pay while investing.
  • RetireGuide Calculator — An easy-to-use retirement planner tool, although not as comprehensive as Personal Capital’s Retirement Planner.
  • Flexible Portfolios — If you have $100,000 or more to invest, you can use Betterment’s Flexible Portfolios to customize your asset allocation.
  • Analyze Accounts Beyond Betterment — Betterment will now let you analyze the retirement savings accounts you have outside its platform. This aggregation can help you keep your portfolios straight and well maintained.
  • Personalized Advice Packages — Betterment now offers advice packages created to answer your pressing financial questions, from getting started to retirement planning.
  • Goal-Based Investing — Betterment lets you align your investments — including those outside the platform — to your specific financial goals.




Cons

  • Not for DIYers — For advanced, high-net-worth investors who want to do it themselves, Betterment might not be the perfect fit. If you can roll your own asset allocation and know investment theory, there’s little need for using a service like Betterment. In addition, you may need tax advice, which Betterment cannot offer.
  • Cannot Asset-Allocate With External Accounts — The biggest limitation of Betterment (and most other robo advisors) is it can manage only accounts at Betterment. While Betterment can display your 401(k) plan, it cannot create an overall asset allocation plan with your 401(k) in mind.
  • No REITs or Commodities — Betterment does state these asset classes don’t increase returns, but from some research, we’ve seen they do decrease volatility.

Summary

Without question, Betterment’s fees are much lower than you’d find if you were to hire a traditional financial advisor. If anything, with a professional money manager, you would get similar or weaker returns but pay much more in management fees. With the introduction of human advisors, Betterment has become a formidable competitor to Vanguard’s Personal Advisor Services. Still, the more advanced investor might do better doing it themselves with a more diverse asset allocation selection and save money in annual fees in the process.

With a focus on the end user, Betterment aims to provide users with a holistic plan to help them maximize their portfolios and meet their goals. If you’re looking for strategies on improving all of your investment portfolios, Betterment might be a great fit for you.

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